Policy Credibility Scenario

Legalizing Private Importers

In the imaginary country of Economia, a Trade Board has a legal monopoly on the import of consumer goods. The Trade Board purchases consumer goods from foreign exporters and resells them at much higher prices to domestic retailers. The Trade Board functions to limit the amount of imports of consumer goods and to provide funds for the import of key intermediate inputs for strategically important industries.

Some small private companies illegally import consumer goods. Initially the Customs Police, which is subordinate to the Trade Board, made great efforts to prosecute companies illegally importing goods. The illegal importers were, however, difficult to suppress. Moreover, the private importers often located foreign suppliers with which the Trade Board had no contacts. These suppliers often supplied goods that were otherwise unavailable through official Trade Board channels and were an important source of supply for other goods when the Trade Board suffered from temporary shortages. Because the economic importance of the private importers were widely recognized, after a period of time only weak and sporadic efforts are made to prosecute them.

The Economics Minister is concerned because Trade Board revenue is falling short of that necessary to fund strategic imports. He proposes to legalize the private importers, thereby freeing them from the threat of Custom Police prosecution. In exchange for acquiring legal status, the private importers will be subject to licensing and import taxes that the Trade Board has been empowered to collect. The Economics Minister hopes that, by providing legal sanction for private importers, the number and size of private importers will grow along with revenue for strategic imports.

A key policy issue is how private importers evaluate the Economics Minister's policy. Most private importers agree that, given the announced license fees and import taxes, it makes sense to register with the Trade Board and acquire legal status. However, there is concern about policy reversals or possible increases in license fees or import taxes. Suppose that you were a private importer in Economia. How would you assess the likelihood that the legal regime for private importers will remain favorable to you, i.e. how would you assess the credibility of the Economics Minister's policy?

Highly Credible
Probably Credible
Somewhat Credible
Doubtfully Credible
Not-at-all Credible

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